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Finance: What is risk? 4 Views

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What is risk? When looking at risk from an investment standpoint, it’s not all bad. As with any decision, higher risk can mean higher reward, and this is certainly the case in the investment world. Unfortunately, higher risk can also mean higher loss. Either way, risk should be looked at pretty thoroughly when making investment decisions, and should correspond with the investor’s financial goals.

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Transcript

00:00
finance a la shmoop. what is risk? it's a game! this one remember Parker Brothers
00:08
roll the dice move your armies take Kamchatka own the world! okay so that's a [risk board game pictured]
00:13
slightly different variant than investing risk. but think about the
00:17
notion of risk and reward being married to each other in a we fight every
00:21
Thanksgiving and question why we were ever married in the first place kind of

00:26
way. buy a US government bond and the odds it doesn't fully pay as promised are
00:31
about equal to the odds of our being nuked. typically investors trade-off
00:36
between risk and reward if you take high risk you want high reward, or at least
00:41
the potential of it. it would be kind of stupid to take high risk for no reward
00:45
right? well the US government pays its bills hi Greece we're looking at you. but
00:50
a bond only gets you a few percent a year return these days. had you bought
00:53
call options on Amazon when it was 500 bucks a share with those call options at
00:59
$700 expiring four months later, well you'd have taken massive risk but at the [chart showing growth of amazon stock going up]
01:05
end of those four months had you timed things right
01:08
you'd have made like 20 times your money. how do you timed it just one month early
01:12
or late well you'd have lost everything. investing in the stock market generally
01:16
carries two flavors of risk. there's market risk ie the risk that the whole
01:21
market goes down and you lose money that way, and then there's intrinsic or
01:26
individual stock risk. ie the market just trundles along but you pick a bad stock
01:31
and it goes down while the market is flat or goes up. got it ?market risk .the
01:36
whole world blows up and your nest egg gets taken down with it. intrinsic risk.
01:41
it's only you who sucks. you put all your eggs in a basket with a bad handle and
01:46
well now there are a lot of chickens that ain't going to happen. [eggs in basket]
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